Commercial property lessees who
want to beg off their existing lease
have an alternative that can result in minimizing their financial loss: sub-leasing. It’s an alternative that creates a
win-win situation for both the lessee and
the sublessee.
“The hidden opportunity for the tenant
is to get out of an existing lease with a
minimum loss,” says Sam L. Hocker,
Senior Vice President of the Office
Services Group in the Dallas Office of
Grubb & Ellis Co. “The hidden opportunity for the landlord is a possible chance
to make a more competitive transaction
for a new tenant. And the hidden opportunity for the new sublessee is obtaining
space at a discount price.”
Smart Business talked with Hocker
about the ins and outs of subleasing in
the Dallas area.
What are some of the market conditions
that have led to the increase in sublease
inventory?
Available commercial subleasing space
began to trend upward in 2005, when the
inventory was about 3.5 million square
feet. By the end of the fourth quarter,
2007, about 4.9 million square feet were
available.
It’s hard to pinpoint one single reason.
Not all availability is because of negative
business conditions. Some space has
become available because companies
outgrow their space. Mergers and acquisitions often end up in either abandonment or consolidation of space. And
some companies — like financial companies caught up in last year’s credit crisis — simply downsize.
The economy — which is apparently
slowing down — is another reason for
more subleasing space becoming available.
Where do opportunities lie for tenants?
We used to negotiate over who was
going to get the profit on any sublease
that occurred, but it’s hardly a profitable venture anymore. I haven’t seen a profit
made on a sublease in 25 years.
So the point to subleasing is more to
minimize a loss within a reasonable period of time. If you need to sublease some
of the space you’re currently leasing,
you probably have to sublease it for
much less than what you’re paying to
lease it. But losing 25 percent of your
property investment is better than losing
100 percent.
If the term is less than five years, then
the discount is significant because of the
inherent expense associated with a
move. If the remaining term is less than
three years, the space is often unmarketable, so your chances of recovery are
not very good. It’s like an icicle. The
longer it takes to sublease a space, the
less you have to offer.
Where do opportunities lie for owners/landlords?
If the existing tenant hasn’t been successful subleasing, it may be willing to
buy out the lease for 50 to 75 percent of its remaining obligation. That transaction could result in a substantial amount
of ready cash for the landlord.
Subsequently, the landlord could give a
possible new tenant an extended term.
Discount shoppers don’t mind moving
around at the end of subleases; that’s
one of their operational efficiencies, if
they get the properties at cheap enough
prices.
So the new deal would lower the landlord’s cash burden on the front end, and
any other landlord would have to reach
into his own pocket for enough money
to compete for the new tenant. The landlord ultimately receives money contributed from the departing tenant —
plus an extended term on the new tenant’s lease.
How does the situation become win-winwin for all parties involved in a deal?
As I said, the opportunity for a landlord
is to be more competitive to secure a
new tenant. His creditworthy tenant is
willing to buy out the existing lease so
the landlord can then make a new transaction. Usually, the new lease is for a
term that extends beyond that of the
original lease. Another advantage is that
the landlord has enough ready cash to be
highly competitive for new tenants. If
another landlord without sublease space
is competing for the business, he may
not have the ready cash to build out his
available space.
Meanwhile, with a buyout or by sub-leasing, the existing tenant gets out of its
rent obligation for substantially less than
what it would normally owe the landlord.
And the tenant that’s coming into the
property would get a discount price, a
favorable build-out and the extended
term that it wouldn’t get in a normal
lease or sublease.
SAM L. HOCKER, CCIM, SIOR, is Senior Vice President of the Office Services Group in the Dallas Office of Grubb & Ellis Co. Reach
him at (972) 450-3322 or [email protected].
